Segmental Reporting
1 Introduction to segmental reporting
Segmental reporting can be seen as “the analysis of the financial information of an enterprise or group between the different business activities and/or the different geographic areas in which it operates” . The reason for this reporting division into different business activities and geographic areas is that these have different profit potentials, growth opportunities, degrees and type of risk, rates of return and capital needs. Because of these differences, it is possible that consolidated financial statements are not sufficient (these financial statements summarize the results and financial position for the reporting entity as a whole). The disclosure of information about an enterprise’s operation in different industries, its foreign operations and export sales, and its major customers, as an integral part of financial statements, may provide a solution to this problem (Thoen and Lefebvre, 2001).
2 Origin of segmental reporting
Four theorems that are characterized by an accounting or a financial background can be considered as factors that created a need for the segmentation of information. In the following paragraphs, a brief description of these theorems will be given.
2.1 The fineness-theorem
This theorem states that “given two sets containing the same information, if one is broken down more finely, it will be at least as valuable as the other set.” Applied to segmental reporting, this means that the segmented information will always contain information that is as usual and valuable as the information provided by aggregated financial statements.
2.2 Market efficiency theory
According to Fama (1970), three kinds of efficiency can be distinguished, depending on the available information: (1) weak form efficiency, (2) semi-strong form efficiency, and (3) strong form efficiency. A market is efficient in the ‘weak form’ when all past prices are reflected in today's price. A market is efficient in the ‘semi-strong form’ when prices reflect all public information. At last, a market is efficient in the ‘strong form’ when all information in a market, whether public or private, is reflected in the price.
The reporting of segmented information by companies may be useful to create more efficient markets. This is because this kind of information increases the tra...
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...on the internal corporate structure, and (4) segments for each individual market in which the company is operating. Corporations may obviously also make a combination of these dimensions. The choice of the segmentation base depends on the type of company and on should be made with the intention to optimise the entity’s financial reporting.
5.2.2.2 Difficulties related to the information to be disclosed
References
Emmanuel, C. & N. Garrod (1992). Segment reporting: International issues and evidence. Prentice Hall, ICAEW
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of finance, Vol. 25, pp. 383-417.
Flower J. & G. Ebbers (2004). Global Financial Reporting. Palgrave Basingstoke.
Mautz R.K. (1968). Financial Reporting by Diversified Companies. Financial Executives
Research Foundation, New York.
Radebaugh L.H. & S.J. Gray (1993). International Accounting and Multinational Enterprises. John Wiley & Sons (USA), 3rd edition.
Thoen V. & C. Lefebvre (2001). A critical analysis of segmental reporting based on an international perspective: a ground for better regulation. DTEW Research Report 0152, K.U.Leuven, 34 pp.
Melton, Gary B. "Mandated Reporting: A Policy Without Reason." Http://blstrumm.weebly.com. Clemson University, 6 May 2004. Web. 15 Apr. 2014.
Rittenberg, Larry, Bradley Schwieger, and Karla Johnstone. Auditing. 6th ed. Mason: Thomas South-Western, 2005. 10-40.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
Olusegun Wallace, R. 1996. The Development of Accounting Research in the UK. In: Cooke, T. and Nobes, C. eds. 1997. The Development of Accounting in an International Context. London: Routledge, pp. 218-254.
Geographic segment disclosures enables users to observe risks, resource concentrations and ‘whether the performance of one business subsidised the performance or lack of performance of another’ (Harmer 2007). Relevantly, Australian Aviation (2011) claimed that Qantas was subsidising Jetstar while hurting its mainline operations through asset movements, EBIT for Qantas Frequent Flyer was 30% but under full brand (including international and domestic) only produced 0.6% return compared to Jetstar’s 6% and IO’s loss may have consumed some of the corporate/unallocated segment’s $123m (Creedy 2011), yet Qantas mainline had disproportionately higher staff (27,000 people) compared to Jetstar’s 3100 and Frequent Flyer’s 82 (O’Sullivan 2011).
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
Albrecht, W. S., Stice, J. D., Stice, E. K., & Skousen, k. F. (2002). Accounting Concepts and Applications. Cincinnati: South-Western.
Information on the financial statement can offer an overview of a company’s performance over the past fiscal year. However, gaining crucial investment insights requires financial manipulation that yields financial ratios.
Schofield (2014) researches the difference between public and private company financial reporting. For instance, a private company has fewer consumers reviewing their financial statements, whereas public companies could have multiple consumers reviewing financial statements. In addition, private companies typically have less specialized accounting personnel, whereas public companies will have several. Lastly, Schofield (2014), reviewed the number of amendments proposed and finalized to help benefit private companies financial reporting.
It is important that the writer is objective and doesn't insert their own position on the issue or topic in the report. A report should have a focused topic, a confident tone, definitions of important terms, reliable information and resources, and good organization. The authors also say that
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
Since the originative works of Fama (1965 and 1970), where an efficient market from the informational execution point of view was defined as one where “stock prices ‘fully reflect’ all available information” (Fama 1970) and market efficiency was categorized into three levels: weak-form, semi-strong form and strong-form. First of all, the information set through weak form efficiency, reflects only the historical prices or returns. Second of all, the information set in semi-strong form efficiency, contains information available to all market participants. Lastly, in strong form efficiency, the information set consists of all information available to any market participant.
Peasnell, KV 1982, ‘The function of a conceptual framework for corporate financial reporting’, Accounting & Business Research, vol. 12, issue. 48, pp. 243-256, viewed 05 May 2014
GARRISON , B., (1996). Successful Strategies for Computer-Assisted Reporting. Mahwah, NJ, USA: Lawrence Erlbaum Associates.